Overview of SIP (Systematic Investment Plan)
SIP can be termed as a disciplined model of investment; it is essentially a systematic investment plan. A fixed amount, as chosen by the investor, can be put into the mutual fund at predetermined regular intervals. Compounding and rupee cost averaging work in it in a methodical way. Therefore, SIP is preferred more for long-term investment.
Benefits of a Monthly SIP
- Disciplined Approach: Saves and invests cash and saves the company money.
- Power of Compounding: Ability to grow large amount of capital over time.
- Rupee Cost Averaging: Minimizes cyclical risk which result when prices are high by buying larger quantities and when prices are low by purchasing small quantities.
- Convenience: Suitable for investors of less means, but also easily manageable for those with more substantial capital.
SIP – Benefits & Risks of Investing ₹10000 Every Month for 30 Years
Assumptions for Calculation:
- Monthly SIP amount: ₹10,000
- Expected annual return: 12%
- Investment tenure: 30 years
Formula for SIP Maturity
The future value of SIP investments can be calculated using:
Where:
- FV = Future Value
- P is the installment of SIP (monthly payment).
- r = Monthly return rate which is the total return per annually divided by 12.
- n = No of SIP installments; Years of commitment × 12
Calculation
- P = ₹10,000
- r = 12%/12 = 0.01 (1%)
- n = 360 installments, if n = number of 30 installments in one year, that is, if n = 30 × 12 = 360.
Using the formula:
- Thus, the future value of the SIP at the end of 30 years will be around ₹ 3.5 crore.
Consequences of the Lack of Installments
Common Scenarios:
- Occasional Misses: Fail of one or two installments of SIP mainly due to the inadequacy of funds.
- Regular Skipping: Someone not attending several SIPs for a long time.
- Early Termination: Change from an SIP with a longer term to an SIP with a shorter term to the premature halt of the SIP before the agreed time is over.
Impact on Returns:
Lack of the installments impacts the compound interest immediately as well as the total maturity sum. For instance:
Missing 12 Installments:
- Total SIPs completed: 348 (30 years – 1 year)
- Future Value or FV comes down to a figure of ₹ 3,30,00,000.
Missing 24 Installments:
- Total SIPs completed: 336 (30 years – 2 years)
- In the very last year, Future Value (FV) decline to nearly ₹3.1 crore.
Key Observations:
- This demonstrates that even one or two SIPs are crucial to the final corpus though they can bring about major decreases.
- If the SIP misses happen earlier during the tenure, the means more damage due to compounding of rate by the remaining period of SIP.
Oversight of Installation of Missed SIP Payments
Steps to Mitigate the Impact:
- Top-Up SIPs: You should increase your SIP amount for some time in order to make for the missed instalments.
- Lump-Sum Investments: Lump Sum Investment to fill the gap.
- Review Financial Plan: Check cash flows, and make provisions for an emergency so that there are no more incidents like these in the future.
Flexibility of SIPs:
The great thing about most mutual fund plans is that they allow to temporarily suspend SIPs without discontinuing the plan. This feature makes it possible to invest more without having a loss of the portfolio to compromise on investor’s continuation.
Example Scenario
Case Study: Raj’s SIP Journey
- Initial Plan: By investing about ₹10,000 monthly for 30 years continuously at the return rate of 12%, Raj’s corpus will become.
- Missed Installments: As for the case of Raj, he failed to make 18 payments (a total of 1.5 years).
Impact:
- Total SIPs completed: 342
- Future Value to be cut down from ₹3.5 crores to almost ₹3.25 crores.
Insights:
- When installments were being missed Raj’s reading list shrunk by as much as ₹ 24, 980.
- He got over this by investing a lump sum of ₹ 2 lakh, thus regaining almost half of his expectant returns.
Benefits That a Societal Actor Gains When Staying Consistent
- Wealth Accumulation: Consistent contribution make the most of reinvestment.
- Rupee Cost Averaging: Provides better returns irrespective of market nature and volatility.
- Goal Achievement: Fidelity is compatible with long-term objectives for example, saving for retirement or for children’s education.
Drawbacks of Missing SIP Installments
That is why we can highlight the following disadvantages of missing SIP installments:
- Loss of Compounding: Reduced returns over time.
- Discipline Break: Disturbs the culture of saving arranged in order.
- Emotional Stress: Results to instability of finances.
- Higher Catch-Up Costs: There will be need to fund for those contributions that could not been made for various reasons.
Conclusion
Investing ₹10,000 per month for investing in SIP for 30 years can accumulate a whopping amount of ₹3.5 crores.
While avoiding some installments can be done, they do affect the final sum quite a lot. Investors should strive to stick to their SETs, use tools such as top-up SIPs and being prepared for any inconceivability that may arise in the middle of the investments.
When followed strictly, SIPs can act as a sophisticated means of creating wealth hence financial freedom.
Frequently Asked Questions
1. Specifically, how this SIP installment skips erodes the wealth creation process and how it affects long-term investment gurus?
For example, if you never pay an instate of a SIP installment, the compounding effect is slightly less because the amount invested is less than you desired. But one is likely not to lose substantially from his corpus if one misses a few installments say in three decades.
2. Can I make up pact of missing SIP installments in near future?
Yes, you can compensate by increasing the sip amount or put in lump sum amount when one has excess amount. This not only assists in meeting the lost installments.
3. Is it possible for a SIP installment to be missed and if so, what happens?
On average, no consequences proceed from the failure to pay any installment according to the SIP terms. However, there could be a scenario where you lose track of few installations and in such a case based on the policy of the fund house SIP might be halted.
4. Does missing installments of SIP affect one’s credit score?
SIP payments are not affected by your credit score in any way, they are completely independent. If you miss on an installment, your credit worthiness of your company does not get impaired in any way.
5. Have any of the readers been able to temporarily suspend the delivery of SIPs?
Yes, majority of the fund houses permit you to put SIPs on hold for some time (normally 3-6 months) without terminating the plan. It will be helpful during the times of a financial crisis.
6. What do I need to do if I fail to make a SIP installment because my account doesn’t have enough money?
In case, there is no sufficient balance in your account you won’t be able to invest during SIP transaction. But it can be invested at a later date if you wish by you manually inputting the missed amount.